To setup PayPal as your payment processor, navigate to Settings --> Office Settings -- > Payment Options:

Next, click on PayPal Website Payments Pro, and add your API Username, API Password, and API Signature, that PayPal provides you with:

NOTE: You can only use a PayPal Pro account with the ISN and not a PayPal Standard account.

If your clients receive this message; "this transaction cannot be processed due to invalid merchant configuration (10501)", it means that you need to log into your PayPal account and sign your billing agreement with them. Once that has been signed you should no longer receive that message, however if you have any further questions or concerns regarding this manner, please contact PayPal directly.